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FOMC Expends QE3 and Links Rates to Unemployment–FOMC Meeting

December 12, 2012

The FOMC concluded its last meeting this year and as the market had anticipated, the Fed announced it will expand QE3 that will include in addition to the Fed purchasing mortgage-backed securities at a pace of $40 billion per month; the Fed will also start purchasing long term securities at a pace of $45 billion per month. The Fed also announced it will keep the short term rates low until the rate of unemployment will fall below 6.5% . Currently gold and silver prices are increasing.

Back in September the FOMC launched QE3 and keep the short term interest rate unchanged until mid-2015. In the October meeting the FOMC left the policy unchanged, now the Fed decided to up its ante and augment its stimulus plan. One factor that could have contributed to the Fed’s decision ot expand QE3 is the expected conclusion of operation twist, in which the Fed extends the maturity of its assets by a pace of $45 billion per month, by the end this month.

The ongoing threat of the fiscal cliff – the low expectations of Congress reaching an agreement on the ways to reduce the deficit – and the slow growth of the U.S economy are among the factors that helped push the Fed towards expanding its monetary policy.

“To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee will continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month. The Committee also will purchase longer-term Treasury securities after its program to extend the average maturity of its holdings of Treasury securities is completed at the end of the year, initially at a pace of $45 billion per month”

This means that the Fed is still concerned of the low growth of the U.S economy and thus decided to introduce an expansion to the quantitative easing plan.

Not all FOMC members were on board with this decision – FOMC member Jeffrey M. Lacker opposed this decision.

The FOMC referred to the slowdown in the progress of the U.S. economy; the recent non-farm employment report still shows a high rate of unemployment (as of November, 7.7%); the U.S GDP grew by only 2.7% during Q2 2012; manufacturing sectors continue to contract.

Last month, the U.S. core inflation edged up to an annual rate of 2.0% (for the core CPI). This isn’t something that should bother the FOMC for the near future. The FOMC is still anticipating the inflation will remain below the 2% rate during the year. The FOMC extended its pledge of the low interest rates at 0 to 0.25% at least until the mid of 2015. Moreover, the Fed will also keep the low cash rate at least until the rate of unemployment will fall below 6.5% (currently the rate is at 7.7%).

The table below shows the bullion markets’ reactions to the news of the FOMC during 2012. As seen, in the September FOMC meeting bullion rates hiked on the day of the announcement. This time this decision is likely to also pull sharply up the prices of gold and silver at least on today.

Currently gold and silver prices and Euro/USD are increasing:

Euros to US dollar exchange rate is currently traded up at 1.3089 a 0.65% gain as of 18:01*.

Current gold price, short term futures (short term delivery) is traded at $1,722.2 per t oz. a $12.6 increase as of 18:01*.